Why Trump's Tariff Tactic Is A Case Study To Understand Game Theory

NDTV

2 days ago

In most negotiations, people assume success comes from persuasion or compromise at the table. But those who understand game theory know the real strategy starts long before the first conversation. Game theory is the study of strategic decision-making that helps you anticipate your counterpart's likely responses, limit their choices, and frame the game in your favour from the start.
Trump's Strategy: Setting the Rules Before the Game Starts
One of the clearest real-world examples of game theory in action was Donald Trump's aggressive use of tariffs during his presidency and campaign trail. He didn't wait to negotiate; he imposed tariffs first and then invited trade partners to the table, often under high pressure.
For instance, Trump recently announced:
A 25 per cent tariff on India, plus a 'penalty' because it buys a large amount of oil from Russia
A 35 per cent tariff on Canadian goods
A 30 per cent tariff on imports from Mexico and the European Union
And floated a 15-20 per cent blanket tariff on most major trading partners
These bold, headline-making moves are not random or reactionary; they're tactical. By acting first and going public, Trump changes the entire dynamic of the negotiation. He forces other countries into a defensive position where reacting becomes the priority and not bargaining from strength.
This tactic fits the game theory principle of limiting the other side's options - they must either concede or escalate.
Structuring the Game Before It Starts
A fundamental game theory principle is to shape the process before anyone enters the room. Trump mastered this by forcing urgency with public declarations. His team would often signal intentions through media interviews, tweets, or formal letters, effectively locking in their stance before talks began.
This is similar to what the European Union did during Brexit negotiations. The EU refused to move forward on future trade until the UK finalised the withdrawal agreement. By sequencing the discussion strategically, they prevented the UK from leveraging major issues early in the process.
Trump used a similar sequencing trick. For example, by threatening auto tariffs, he created enough pressure on countries like Japan, Germany, and South Korea to fast-track bilateral talks. The structure itself becomes a pressure tool.
Why Limiting Choices Creates Leverage
In game theory, power comes from reducing the other party's freedom to manoeuvre. Trump's announcements typically cornered countries with few alternatives: either accept tariffs and damage exports, or come to the table and negotiate.
This strategy is high-risk and often seen as unconventional in diplomacy. But for Trump, it worked because it appeared credible. He rarely gave himself an easy exit that forced counterparts to believe he would follow through.
When he sent a letter to EU Commission President Ursula von der Leyen announcing 30% tariffs on goods, on top of existing tariffs, the EU immediately responded. Though they opposed the tariffs, they expressed a desire to keep negotiating. That quick response, even without agreement, achieved Trump's goal: Move them into reaction mode and back to the table.
How Trump Uses Loss Aversion
Another tactic Trump consistently taps into-consciously or not, is loss aversion. People are more motivated to avoid losses than to achieve gains. Trump often frames negotiations in terms of what the other party will lose if they don't act.
This showed up when he gave companies or countries limited windows to respond to US demands or risk being hit by penalties.
Creating a ticking clock flips the mindset of a negotiation from opportunity to a crisis control state, where counterparts are more likely to concede.
By doing this repeatedly, Trump trained others to treat every offer as time-sensitive and high-stakes. That kind of psychological pressure, especially in public view, boosts leverage exponentially.
Power Comes From Options and Commitment
Game theory defines power in two key ways:
Having credible alternatives - When Trump talked about diversifying supply chains or sourcing goods domestically, even if not immediately realistic, it signalled fallback options. That alone gave him more room to demand concessions.
Committing to your course of action - Trump rarely left room for doubt. When he said he would impose tariffs, he followed through. This made threats feel real and made foreign leaders more cautious in opposing him.
A powerful negotiation move is combining clear commitment with credible alternatives. Businesses do this by preparing substitute suppliers. Trump did it through executive orders, tariffs, and strategic messaging.
Avoiding Deadlock Through Preparation
In complex negotiations, deadlock is a common risk. Trump's strategy often avoided this by creating pressure points early and making the cost of inaction appear high. He didn't rely on last-minute appeals; he structured the negotiation to force movement. If you notice, Trump is using the same tactic on Putin - pressuring with high tariffs to get Putin to stop the Russia-Ukraine war.
From a game theory perspective, this is a smart strategy. If the other party believes stalling leads to worse outcomes, they're more likely to make concessions early. Trump's public tactics, such as tweeting upcoming deadlines or threatening new penalties, were all designed to force decisions quickly.
Trump's tariffs, if fully implemented, would no doubt cause short-term chaos and disrupt multiple economies. But viewed through the lens of negotiation and game theory, they are not simply trade policies; they're a strategic tool. A high-stakes move designed to force engagement, reset leverage, and ultimately bring countries onto an equal playing field. And it has worked. Countries have come to the table...and are paying attention to Trump's threat. It's even resulted in some deals already made.
Trump's strategy isn't about endless dialogue....nor is it about enforcing tariffs unless the other country takes no heed, which has so far not happened. Then, Trump's tariff strategy seems to be more about setting the terms early, projecting strength and compelling action.
Bottom line? Whether in diplomacy or business, these tactics shift power toward the person who shapes the game itself, not just how it's played. Trump understood that perception of power is power. And so far, it's working.